There are few things analysts hate more than surprises, but that’s what they got from the Bank of Canada when it defied market expectations by leaving rates unchanged today.

The central bank said it is maintaining its target for the overnight rate at 3%. Most analysts expected a 25 basis point rate cut.

As well, the central bank left the bank rate unchanged at 3.25%.

Usually, central bank decisions are well telegraphed, and analysts delight in trumpeting their correct calls on these decisions. But today, the Bank of Cnada surprised them with a stand pat decision.

“The Bank of Canada proved today that it has a mind of its own,” notes TD Economics. “Although financial market participants unanimously expected a quarter point cut in the overnight rate, the Bank decided not to comply.”

“In addition, there is no longer a reference in the communication of ‘further monetary stimulus’, which was instead replaced with the view that ‘the current stance of monetary policy is appropriately accommodative’. In other words, the central bank is officially on hold with interest rates. Economic conditions would need to deteriorate beyond their expectation or inflation would need to heat up in order to prompt a monetary response,” TD suggests.

RBC Economics says that the move indicates that the balance of risks for the inflation outlook have shifted slightly to the upside. “Even though Canada’s economy posted weaker-than-expected economic activity in the first quarter, tentative signs that the U.S. economy will avoid recession and that financial markets, while skittish, no longer are priced for recession, have dampened some of the downside risks to Canada’s economic outlook,” it notes.

“In today’s statement, the Bank showed heightened concern about the inflation outlook, stating that if the recent spurt in energy prices persists ‘total CPI inflation will rise above 3% later this year’,” RBC adds. “The tone of today’s statement makes clear that the Bank of Canada has joined the ranks of other central banks who are fearful that inflation pressures are brewing and will bolster inflation expectations.”

National Bank Financial points out that, in addition to upside risk to inflation posed by rising energy prices, “it would appear that our central bank — in light of the dismal productivity performance of recent years – is becoming less at ease with its own measure of potential growth.”

CIBC World Markets adds that, “while new worries about upside inflation risks are hardly a stunner, what was unexpected was the Bank’s apparent shift on the downside risks to growth, and therefore prices. It shrugged off a first-quarter real GDP decline as broadly in line with its expectations, although last we looked, the Bank forecast called for 1% real growth. And it seems to be buying into the view from the Fed that the risks of a housing and financial market blow-up in the U.S. economy have waned. There will be armchair central bankers questioning that optimism, particularly in hard hit areas of the Canadian economy centered on manufacturing.”

“Though this morning’s press release does not suggest an imminent reversal in Canadian monetary policy, the Bank has abandoned its easing bias in favour of a more neutral stance (sooner than the market expected),” NBF adds. “Despite today’s rate decision by the BoC and developments south of the border, we believe that it is still too early to call for rate hikes this year. In our view, the continuing drag on Canadian GDP from a weak external sector due to a feeble U.S. economic recovery in 2009 will keep growth well below any reasonable measure of potential GDP growth through the middle of 2009.”

RBC agrees that the Bank of Canada is unlikely to switch to a tightening policy stance in the near-term, especially with the economy growing at a slower-than-potential rate this year.

BMO Capital Markets also observes that, “The focused concern on upside headline inflation risks suggests that the Bank is done cutting rates. This is an abrupt turn from the last decision date, when officials declared that “further monetary stimulus would likely be required”. It seems that the upside surprises on CPI and oil prices have swamped concerns about Canada’s growth outlook. Can’t quarrel with the decision, but the issue here may be on the communications front.”

CIBC also suggests that the Bank’s decision may be telling in terms of what central bankers are saying to each other in terms of inflation, growth, and the ability of the financial system to weather the current storm. “If the Bank of Canada is willing to be patient having only eased to 3%, and having seen a drop in real GDP in Q1, then the Fed is likely to be similarly patient with rates down at 2% and a negative quarter in store for Q2,” it says. As a result, “We no longer expect Bernanke to come through with a final US rate cut even if growth disappoints.”

@page_break@The central bank has slashed its key lending rate by 1.5 percentage points since early December. At its last policy meeting in April, the central bank cut its overnight rate by half a percentage point.

The Bank of Canada’s next scheduled date for announcing the overnight rate target is July 15.

The bank will publish an updated projection for the economy and inflation, and its assessment of the risks, in the Monetary Policy Report Update on July 17.